In Iron Ore, Quarterly Secrets Instead of Once a Year?

When Brazilian mining giant Vale said this week that it has moved almost all its iron ore sales to a quarterly pricing system, it took pains to emphasize that the move from the traditional once-a-year pricing format would enhance transparency.

Bloomberg News

Iron bars in a metal fabricator’s workshop in Australia.

Vale’s shift, which follows BHP Billiton’s, is crucial because Vale’s price-setting role has always been pivotal. The Brazilians used to be the staunchest defender of the benchmark system. Its defection to a cause championed by BHP, and less stridently by Rio Tinto, has helped to completely shift the iron ore landscape and make the downfall of the 40-year-old benchmark system inevitable. Rio has also said that it will be using a range of pricing systems this year, moving away from the benchmark.

But to some, Vale’s new system appears, frankly, even more murky.

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Vale, like its mining brethren Rio Tinto and BHP used to officially announce prices once a year, but now Vale is saying it won’t make any such public disclosures any more.

“We decided that the benchmark is over for us, so there is no need to make public our bilateral agreements with our clients,” Pedro Gutemberg, Vale’s marketing, research and development director, said at an industry conference in Beijing Tuesday.

The company made good on this position, by keeping mum when pressed by reporters to disclose its new prices Thursday.

Transparency helps the market. Not disclosing prices helps Vale and its shareholders, giving them more latitude to adjust prices to its needs. It doesn’t help its customers, the vast swathe of steelmakers who are the building blocks of industrialization and development around the world. It makes the ore-buying customer less able to defend its price arguments based on a clear, public knowledge of the wider market.

Vale has been the first to strike deals under the new quarterly system, with Japanese and Korean steel mills. That’s likely to be new “benchmark,” if we could use an old industry term.

What we know of Vale’s new system is this: It’s a single price negotiated quarterly with individual steel mills, so each mill could get a different deal. It’s likely that the price is based on established iron ore indexes, of which there are three global standards and a range of local and regional ones.

Vale has declined to confirm a Brazilian media report that it would use a Platts iron ore index as its reference.

The basis of the claim to transparency is easy to understand: If Vale, and other miners, base pricing arguments on publicly available indices, trends are easier to discern and steelmakers can make use of a burgeoning iron-ore derivatives market to hedge accordingly.

In fact, a majority of derivative market experts at an industry conference in Beijing this week said they agree the system is more transparent, largely based on the argument that the index-based pricing would now be preeminent, rather than the often-acrimonious, politically driven once-a-year benchmark process.

But not all senior industry analysts agree.

“For the financial markets’ point of view, the new regime is less transparent than the old benchmark system, as well as less consistent throughout the year due to spot price moves,” BMO Research’s Tony Robson wrote in a note Friday.

The idea of quarterly price agreements struck with individual steelmakers is designed to take the Sturm and Drang out of the old benchmark system, and end what Vale’s Gutemberg has called the “never ending confrontation” with China.

But until Vale tells us more, whether it’s also more transparent remains, well, opaque.

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